As technology continues to morph from a businesses support tool to a business development driver, it is also a bigger piece of investment companies' budgets.

In a recent survey conducted by SEI and the Investment Advisor Association 60% of asset management firms said they expected to increase technology spending in 2007, listing the top three drivers as compliance, accounting and reporting programs, and higher compensation for information technology staff. Conversely, only 13% of respondents said their technology spending would be dedicated to developing new infrastructure or systems, such as e-mail retention or storage programs.

"People spent a lot of money before Y2K and after 9/11 to beef up their systems," said Paul Schaeffer, a managing director with the investment management services division of Oaks, Pa.-based SEI, who helped oversee the study. "They spent a lot of money on technology infrastructure and now where they may be putting the money is on the process," he said.

SEI and the Washington-based IAA surveyed 31 money managers with between $100 million and $40 billion under management, the mean being $937 million. In 2006, those firms spent, on average, 13.6% of their operating budgets or $11,900 per employee, on technology, with the mean being 4.8% and $7,300, respectively.

Of the 60% that anticipate allocating more this year to technology, 84% cited compliance among the main drivers of those costs. More than 50% said it would be the primary source of technology spending. No respondents saw any opportunity to trim tech spending in that sector.

When asked what the primary measures of business strategy were, investment advisors overwhelmingly ranked shareholder return first, followed by profitability and net asset growth.

These responses reflect the fact that commitment to compliance and data protection, and the ability to attract new funds, are inextricably intertwined, said Louis S. Harvey, president of Boston-based fund ratings firm Dalbar.

"More than a marketing advantage or disadvantage, it's a prerequisite," Harvey said. Institutional clients with whom investment firms "are doing business with are so cautious about things from anti-money laundering to data theft to other regulatory requirements, that investment companies that do not invest in technology to support that will walk away from business," he said.

The passage of the 2006 Pension Protection Act and the various opportunities and regulations it presents, means focus on this area will only increase, Harvey said.

"Frankly, the only practical way to deal with these things is through technology. Without technology investments, one would not be able to comply with any of these standards and remain competitive," he said.

But strict compliance-related tasks aren't really where the bulk of tech spending will go.

While adhering to ever-changing regulations presents a constant cost center for investment companies, the actual price tag is relatively small, said Gavin Little-Gill, a senior analyst with TowerGroup, a technology-focused consulting and research firm in Needham, Mass. In fact, when it comes to pure compliance-related costs-only those applications directly related to meeting regulatory requirements-spending represents only about 5% of companies' technology budgets, he said.

"It's politically untenable to say regulatory spending isn't our number one goal, followed by the needs of clients, but the reality is, when we get out there and talk to clients, it's making money that's the number one goal," he said.

Results of the SEI/IAA survey support that, indicating that the second major cause for increased tech spending among investment companies is portfolio accounting and client reporting, followed by IT salaries and bonuses.

In fact, 40% of those surveyed said they use more than one portfolio accounting system, while 38% use multiple trade order systems, and some have relationships with eight or more outside data vendors.

"We're in this mode of product development and customization to meet client needs," Schaeffer said.

In an increasingly competitive environment where investors-institutional investors especially-have become more sensitive to looking for low-fee products, investment companies are struggling to meet their demands without shaving their margins, Little-Gill said. "The reality is, people aren't willing to pay for actively managed portfolios that have performance no better than an index," he said.

Roughly 60% of respondents to the SEI/IAA survey said much of their increased spending would go to operations, compared to 50% who increased operations spending in 2005. That's because the ever-lasting hunt for alpha and low-cost beta demands investment companies use more complex tools-from alternatives to derivatives, to short sales. With these strategies comes the need for accounting and management systems that can support them, Little-Gill said.

The true technology cost centers, he said, are those systems and products that provide necessary analytics and can support complex trades of various asset classes. Also critical will be staff who understand what they do and can manage them efficiently, Little-Gill added. Just under half of respondents expect to increase spending on IT staff salaries and bonuses, according to the SEI/IAA survey.

"When you have tech people with the understanding of the business process, they are incredibly valuable," he said. Such employees with dual-expertise are few and far between.

That's where hiring an outside firm can help, said Schaeffer, whose company provides various services to investment companies. "Organizations need to think about what's the best use of their resources and where they can get leverage," he said. Hiring outside experts can help manage risks, provide efficiencies and allow better focus on core business functions, such as attracting new assets. "Organizations that do this successfully will have a really strong partnership with their [provider] and a very strong knowledge of their business," he said.

Because these systems must be programmed to be sensitive to both U.S. and international regulations, they often get lumped in with compliance. "Regulation is the politically appropriate thing to list, but the reality is, the primary priority of the institution is to make money, and the technology investments that are taking place are about making money," Little-Gill said.